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Reserve Bank of New Zealand Analytical Notes Not a jobless recovery, just a slow one AN 2012/06 Rebecca Craigie, David Gillmore & Nicolas Groshenny September 2012 Reserve Bank of New Zealand Analytical Note series ISSN 2230-5505 Reserve Bank of New Zealand PO Box 2498 Wellington NEW ZEALAND www.rbnz.govt.nz The Analytical Note series encompasses a range of types of background papers prepared by Reserve Bank staff. Unless otherwise stated, views expressed are those of the authors, and do not necessarily represent the views of the Reserve Bank. Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 2 NON-TECHNICAL SUMMARY1 We compare the current recovery in the New Zealand economy with the recoveries from the previous two recessions, focusing on the developments in the labour market. By way of comparison, we contrast the New Zealand situation with that of the United States, during its current and previous two recessions.2 Our main findings are: � The current recovery in New Zealand has been slower than following previous recessions. � During this period the labour market has been subdued. � However, growth in employment (and hours) has been higher than would normally be expected, given the rate of GDP growth. � This implies a lack of productivity growth. 1. INTRODUCTION The 1990-91 and 2000-01 recessions in the United States have been described by many economists, market analysts and policymakers as “jobless”, due to the extended period of unusually low (or zero) employment growth while output recovered.3 However, a recent study by Galí, Smets and Wouters (2012) insists that the “jobless” label is inappropriate, as the recoveries from those two recessions and from the current one have been characterised not only by unusually low employment growth, but also by unusually low GDP growth. They therefore suggest that they be relabelled “slow recoveries” rather than “jobless”. The “slow recovery” label also appears to be appropriate for the current situation in New Zealand. GDP growth during the current recovery has been particularly low, while growth in employment and hours paid, though low, have actually been higher than expected given growth of GDP and historic relationships. The remainder of this note is organised as follows. In the next section we compare the present recovery with previous cycles in New Zealand and the United States. We then consider whether the labour markets in both countries have been in line with economic activity during the current recoveries. We highlight the importance of growth in hours and consider the implications for productivity growth. 1 The authors are grateful for helpful comments and critique from John McDermott, Michael Reddell and Leo Krippner. 2 We have chosen to compare developments in New Zealand with those in the United States simply because most literature and media comment is focused on US issues. 3 See e.g. Schreft & Singh (2003) and Bernanke (2003). Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 3 2. THE PRESENT RECOVERY COMPARED WITH PREVIOUS CYCLES: NZ AND US In this section we highlight the subdued nature of the New Zealand labour market in the current recovery compared with the recoveries following the 1991-92 and 1997-98 recessions, and contrast this with the situation in the United States. 4 The current recovery is much more gradual than those of the previous two recessions. New Zealand’s GDP and employment growth have been subdued, especially when compared with the recoveries from the 1991-92 and 1997-98 recessions (figure 1). The unemployment rate is virtually unchanged since late 2009 and the employment-to-population ratio has improved only a little and remains below its late 2007 level (figure 2). This is in marked contrast to the previous recoveries, when both series began to recover within a year after the trough in the level of GDP. Meanwhile, the labour force participation rate has remained roughly constant throughout the recent recession and recovery, as it also did during the previous two recoveries. In comparison, the US economy has been growing slightly faster (although from a deeper trough) since the recession, while employment has been very sluggish (until recently). The level of employment remained below its 2009 Q2 level until late 2011 (figure 1). The US unemployment rate remains elevated but has been falling over the past two years. The employment-to-population ratio has been at very low levels and virtually unchanged since late 2009, while the participation rate has been on a downward trend (figure 2). Similarities in New Zealand’s profile in the current recovery with that of the US are that the unemployment rate remains at a high level and the employment-to-population ratio remains low (figure 2). But there are differences. The US participation rate has been declining while that for New Zealand has remained roughly constant throughout the recession and recovery. Meanwhile, the New Zealand unemployment rate has remained virtually unchanged since 2009, while the US rate has been declining. The different unemployment pattern for the US is partly due to the greater depth of the US recession and the continued decline in the participation rate, as well as reflecting different labour market practices. The most notable difference between New Zealand and the US in the current recovery can be seen in the profiles of GDP and employment for each country and the implications for productivity growth. This will be considered in the following two sections. 4 For a description of previous New Zealand recessions, see Reddell & Sleeman (2008). Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 4 Figure 1: GDP and employment: NZ and US5 (Vertical lines are trough of GDP level) New Zealand6 United States7 1991-92 recession Index 116 1990-91 recession Index 116 GDP Employment Index 116 Index 116 GDP Employment 114 114 112 112 112 112 110 110 110 110 108 108 108 108 106 106 106 106 104 104 104 104 102 102 102 102 100 100 100 100 98 98 98 98 96 96 96 114 1990 1991 1992 1993 1994 1990 1997-98 recession Index 116 114 1991 1992 1993 1994 96 2000-01 recession Index 116 GDP Employment Index 116 Index 116 GDP Employment 114 114 112 112 112 112 110 110 110 110 108 108 108 108 106 106 106 106 104 104 104 104 102 102 102 102 100 100 100 100 98 98 98 96 96 114 96 1997 1998 1999 2000 2001 98 2000 2008-09 recession Index 116 114 2001 2002 2003 2004 96 2008-09 recession Index 116 GDP Employment Index 116 Index 116 GDP Employment 114 114 112 112 112 112 110 110 110 110 108 108 108 108 106 106 106 106 104 104 104 104 102 102 102 102 100 100 100 100 98 98 98 96 96 114 96 2008 2009 2010 2011 2012 114 98 2008 2009 2010 2011 Data sources for all charts in this Analytical Note: Statistics New Zealand, Haver Analytics, and RBNZ estimates. 5 Graphs covering 1980 to 2012 for series in figures 1 and 2 are shown in the appendix. The New Zealand GDP series is real total production GDP. 7 Note that the dates of past recessions in the United States differ from those for New Zealand. New Zealand experienced a recession in 1997-98 associated with the Asian downturn, while the United States did not, and New Zealand did not experience a recession during the 2000-01 IT-related downturn in the United States. 6 2012 96 Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 5 Figure 2: Changes to unemployment, participation & employment rates: NZ and US (starting point is the previous trough of the unemployment rate) New Zealand United States 1991-92 recession ppts 4 3 1990-91 recession ppts 4 Unemployment rate Participation rate Employment-to-population ratio ppts 4 ppts 4 Unemployment rate Participation rate Employment-to-population ratio 3 3 3 2 2 2 2 1 1 1 1 0 0 0 0 -1 -1 -1 -1 -2 -2 -2 -2 -3 -3 -3 1990 1991 1992 1993 1994 1990 1997-98 recession ppts 4 3 1991 1992 1993 1994 -3 2000-01 recession ppts 4 Unemployment rate Participation rate Employment-to-population ratio ppts 4 ppts 4 Unemployment rate Participation rate Employment-to-population ratio 3 3 2 2 2 2 1 1 1 1 0 0 0 0 -1 -1 -1 -1 -2 -2 -2 -2 -3 -3 -3 1997 1998 1999 2000 2001 2001 2008-09 recession ppts 6 2003 2004 2005 -3 2008-09 recession ppts 6 Unemployment rate Participation rate Employment-to-population ratio 2002 3 ppts 6 ppts 6 Unemployment rate Participation rate Employment-to-population ratio 5 5 4 4 3 3 3 3 2 2 2 2 1 1 1 1 0 0 0 0 -1 -1 -1 -1 -2 -2 -2 -2 -3 -3 -3 -3 -4 -4 -4 -4 -5 -5 -5 -6 -6 5 4 -6 2008 2009 2010 2011 5 4 -5 2007 2008 2009 2010 2011 Employment-to-population ratio is employment as a percentage of working age population (NZ: 15 years and over; US: 16 years and over) -6 Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 6 3. HOW THE LABOUR MARKET HAS DEVELOPED RELATIVE TO OVERALL ECONOMIC ACTIVITY In this section we consider how the labour market in New Zealand has developed relative to economic activity, comparing this with the evidence from the United States. We find that, as for the United States, the current recovery is best described as “slow” rather than “jobless”. What characterises the three most recent US recoveries, including the current one, is how sluggish the growth in employment has been for an extended period (figure 1). This is in marked contrast with previous recessions (1974-75 and 1981-82), which saw employment picking up quite rapidly. Given the similarity of the profile of the current US recovery with the previous two recoveries, with flat employment for an extended period while GDP is picking up, it might be tempting to describe the current US recovery as “jobless”. However, as Galí, Smets and Wouters (2012) have demonstrated, the recoveries from the three most recent recessions (including the present one) have been characterised by unusually low growth in both GDP and employment. Given the unusually low GDP growth, it seems preferable to describe these recoveries as “slow” rather than “jobless”. For New Zealand, we can see that for the recoveries following the 1991-92 and 199798 recessions, employment growth was sluggish for some time followed by a growing divergence between the paths of employment and GDP (figure 1). However, the current recovery has a different profile: very low GDP growth and very low employment growth. Allowing for a lag in employment with respect to GDP, they appear to be moving together. How unusual are the GDP and employment profiles of the current recovery? Extending our comparison to recoveries from 1960, we see that GDP in the current recovery has been rather subdued (figure 3). At four quarters into the recovery, the current track of GDP was not unusual. However, subsequently (especially from seven quarters after the trough), GDP has been particularly sluggish in comparison to previous recoveries. It is almost as subdued as the recovery from the 1974-77 recession, which was marked by much weaker population growth and particularly large net migration outflows. Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 7 Figure 3: New Zealand GDP in the past six recoveries Index 116 114 112 110 108 Index 116 1967-69 1974-77 1979-82 1991-92 1997-98 2008-09 114 112 110 108 106 106 104 104 102 102 100 100 98 98 96 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 96 Quarters before/after trough of GDP Comparing the track of employment in these six recoveries, we see that employment in the current recovery does not appear unusual (figure 4). It follows a similar track for up to nine quarters following the trough as the previous three recoveries. However, it has continued to grow slowly in recent quarters. Figure 4: New Zealand employment in the past six recoveries Index 116 114 112 110 108 Index 116 1967-69 1974-77 1979-82 1991-92 1997-98 2008-09 114 112 110 108 106 106 104 104 102 102 100 100 98 98 96 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 96 Quarters before/after trough of GDP What level of employment growth we would expect given the level of GDP growth? A simple regression of employment on lagged GDP (from 1960 to the trough of GDP in 2009 Q2) suggests that employment growth in New Zealand has been at or just above what we would expect given GDP growth during 2010 and 2011 (figure 5).8 8 The starting date for the regression is 1960, using an estimated backdated HLFS quarterly employment series. A similar result is obtained when regressing hours paid on lagged GDP. Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 8 In comparison, a similar regression reveals that actual US employment growth was only slightly lower than what would be expected from GDP growth through the recession until late 2011 (figure 6).9 For both New Zealand and the United States, these regressions do not suggest that employment has been low relative to GDP to warrant a label such as “jobless”. Figure 5: Annual growth of employment and real GDP: New Zealand APC 7 6 5 APC 7 Employment: actual Employment: fitted (given GDP growth lagged 2 quarters to 2009q2) GDP 6 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 2001 2003 2005 2007 2009 -4 2011 Figure 6: Annual growth of employment and real GDP: United States APC 5 4 3 APC 5 US employment: actual US employment: fitted (given GDP growth lagged 2 quarters to 2009q2) US real GDP 4 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 -6 2001 2003 2005 2007 2009 2011 -6 Schreft and Singh (2003) suggest that firms’ substituting more flexible labour inputs (part-time workers, temporary employment and overtime hours) for less flexible ones 9 The recent pick-up in US employment has been mentioned by Bernanke (2012) as a puzzle in the US labour market data. He suggests that the recent pick-up in the labour market in 2011 may have been a catch-up from larger-than-usual job losses during the recession. Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 9 is a distinguishing characteristic of jobless recoveries. They show that for the United States, temporary and part-time workers increased more than full-time during the recessions they describe as “jobless”. Figure 7: Full-time and part-time jobs filled (QES): New Zealand 1991-92 000s 70 60 1997-98 QES jobs filled (s.a.): difference from 1991Q2 000s 70 Full-time Part-time 000s 70 QES jobs filled (s.a.): difference from 1998Q1 Full-time Part-time 000s 70 60 60 50 50 50 60 50 40 40 40 40 30 30 30 30 20 20 20 20 10 10 10 10 0 0 0 0 -10 -10 -10 -10 -20 -20 -20 -20 -30 -30 -30 -40 -40 -40 1990 1991 1992 1993 1994 -30 1997 1998 1999 2000 2008-09 000s 70 60 QES jobs filled (s.a.): difference from 2009Q2 000s 70 Full-time Part-time 60 50 50 40 40 30 30 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 -40 2008 2009 2010 2011 2012 -40 What do the New Zealand data reveal? The recoveries following the 1991-92 and 1997-98 recessions showed strong growth in part-time jobs filled, above that of fulltime jobs (figure 7). Surprisingly, that is not the case in the current recovery. The last chart in figure 7 reveals minimal pick-up in part-time work during the current recovery, with little difference between this and full-time. The gradual increase in full-time jobs filled appears to be in line with the gradual increase in employment that we see in figure 2. It is interesting that firms have been relying less on part-time workers (than in the previous two recoveries) during a time when economic activity has remained so subdued. To resolve this puzzle, we need to look at hours worked. Unfortunately, we do not have a breakdown for hours worked as overtime or by temporary employees. However the aggregate series is instructive. In figure 8 we have added hours paid, from the Quarterly Employment Survey (QES), to the GDP and employment series of figure 2. What is immediately striking about these charts is the pick-up in hours above that of employment during the current recovery in comparison to the previous two recoveries. So it appears that the current modest recovery is being supported by a gradual increase in employment and a faster pick-up in hours. This suggests that 2001 -40 Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 10 firms may have been relying more on overtime than taking on new staff – which is consistent with the dampening effect of continuing uncertainty on investment and hiring. Figure 8: New Zealand in the current recovery: GDP, employment and hours paid (s.a) 1991-92 Index 116 114 1997-98 Index 116 GDP Employment Hours paid Index 116 Index 116 GDP Employment Hours paid 114 114 112 112 112 112 110 110 110 110 108 108 108 108 106 106 106 106 104 104 104 104 102 102 102 102 100 100 100 100 98 98 98 98 96 96 96 1990 1991 1992 1993 1994 114 1997 1998 1999 2000 2008-09 Index 116 114 Index 116 GDP Employment Hours paid 114 112 112 110 110 108 108 106 106 104 104 102 102 100 100 98 98 96 2008 2009 2010 2011 2012 96 The current subdued economic growth in New Zealand given the stronger-thanexpected track of employment and hours implies a lack of productivity growth in New Zealand in recent years. In marked contrast with the previous two recoveries, productivity has changed little since the trough of the recent recession. This is most evident in the GDP/hours measure of productivity (figure 9). Meanwhile in the United States, growth in productivity per worker has been similar to that of the previous two recessions, while productivity per hour has been flat for the past two years. 2001 96 Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 11 Figure 9: Productivity in recent recoveries New Zealand United States Productivity: GDP/employment Index 112 Productivity: GDP/employment Index 112 110 108 106 1997-98 104 Index 112 110 110 108 108 106 106 Index 112 110 108 2000-01 106 2008-09 104 104 102 102 100 100 100 100 98 98 98 98 96 96 96 1991-92 102 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 102 1990-91 2008-09 -5 -4 -3 -2 -1 104 -5 -4 -3 -2 -1 Quarters before/after trough of GDP 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 96 Quarters before/after trough of GDP Productivity: GDP/hours paid Index 112 Productivity: GDP/hours Index 112 110 110 108 Index 112 Index 112 110 110 2000-01 108 108 106 106 104 104 104 102 102 102 100 100 100 100 98 98 98 98 96 96 96 1991-92 1997-98 106 2008-09 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 Quarters before/after trough of GDP 9 10 11 12 13 14 106 104 2008-09 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quarters before/after trough of GDP 4. CONCLUSION Growth in economic activity in New Zealand has been very slow since the 2008-09 recession. While employment growth has also been sluggish, it has actually been stronger relative to GDP growth than in previous recoveries, and growth in hours worked has outpaced employment growth. The growth in employment and hours worked relative to the subdued GDP growth imply particularly low productivity growth during this period. 108 1990-91 102 96 Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 12 REFERENCES Bernanke B S (2003). “The jobless recovery,” speech at the Global Economic and Investment Outlook Conference, Carnegie-Mellon University, November 6, 2003. Bernanke B S (2012). “Recent Developments in the Labor Market”, speech to the National Association of Business Economists, Washington DC, March 26, 2012 Galí J, F Smets & R Wouters (2012). Slow recoveries: a structural interpretation. NBER Working Paper 18085. Reddell M & C Sleeman (2008). Some perspectives on past recessions. RBNZ Bulletin, 71,1 (June). Schreft S & A Singh (2003). A closer look at jobless recoveries, Federal Reserve Bank of Kansas City, Economic Review, Second Quarter, pp. 45-72. Reserve Bank of New Zealand Analytical Note series _____________________________________________________________ 13 APPENDIX Figure A1: Labour market: NZ & US New Zealand United States Employment 000s 2300 % 67 Employment Employment/population ratio (RHS) Millions 150 % 67 Employment Employment/population ratio (RHS) 66 145 65 140 65 64 135 64 63 130 63 1900 62 125 62 1800 61 120 61 60 115 60 59 110 59 58 105 58 57 100 2200 2100 2000 1700 1600 1500 1400 1980 1985 1990 1995 2000 2005 2010 56 66 57 95 1980 1985 1990 1995 2000 2005 2010 56 Unemployment & participation rates % 12 % 70 Unemployment rate Participation rate (RHS) 69 10 % 12 % 70 Unemployment rate Participation rate (RHS) 69 10 68 8 67 6 66 65 4 68 8 67 6 66 65 4 64 2 63 0 1980 1985 1990 1995 2000 2005 2010 62 64 2 63 0 1980 1985 1990 1995 2000 2005 2010 62 Long-term unemployment (% of total unemployed) % 80 70 % 80 Unemployed 27 weeks & over Unemployed 53 weeks & over % 80 % 80 Unemployed over 27 weeks 70 70 70 60 60 60 60 50 50 50 50 40 40 40 40 30 30 30 30 20 20 20 20 10 10 10 10 0 1980 1985 1990 1995 2000 2005 2010 0 0 1980 1985 1990 1995 2000 2005 Notes: US labour market series are for the civilian labour force, 16 years and over. Employment-to-population ratio is employment as a percentage of working age population (NZ: 15 years and over; US: 16 years and over). 2010 0